International Conference on Economic and Social Studies (ICESoS’13), 10-11 May, 2013, Sarajevo
Correlation of Change in Fundamental Indicators and Stock Price
Movements on Sarajevo Stock Exchange
Enis Dzanic
University of Bihac, Bosnia and Herzegovina
enis.dzanic@bih.net.ba
Abstract
Fundamental analysis is regarded as one of the key tools in evaluating securities by
examining intrinsic value of the business, trough primarily the analysis of its financial
statements. Although in the short run, various factors might influence investment
sentiment and thus stock price movements, in the long run fundamentals should
determine stock price performance. Sarajevo Stock Exchange is a pioneering
enterprise in the development of a capital market in Bosnian transition economy.
Upon examining stock price movements and trade volumes over its ten year history, it
is difficult to argue that high volatility in both factors can be attributed to changes in
corporate fundamentals. We can thus argue that irrational or speculative determinants
are at play; a discouraging prospect for a developing capital market. In order to
investigate the correlation between the change in fundamental indicators and stock
price movements, ten major companies listed on the exchange were selected using
pre-defined criteria, and key fundamental indicators, as well as stock price volatility
was examined for a five year period during which Sarajevo Stock Exchange had
highest trade volumes. The results indicate that ratios that are price-independent have
volatility ten times lower than ratios that are price-determined. Additionally, stock
price analysis indicates high standard deviation; a traditionally accepted measure of
volatility and intra-year stock price spreads often reach hundreds of percent.
Furthermore, when selected indicators are correlated with stock price movements, the
research determined that correlation coefficients are low, sometimes negative,
suggesting no linear relationship between the change in fundamental indicators and
the change in the price of the security. The result of high-risk high-volatility market
situation was a significant decline in value of securities listed on the exchange. This
decline led to a loss of confidence of individual investors in the exchange which can
be illustrated by low trading volumes in the last few years, usually in the region of 1%
to 3% of 2007 levels. The exchange thus is incapable of serving most of functions
traditionally associated with the business.
Keywords: Stock Price Volatility, Fundamental Analysis, Sarajevo Stock Exchange.
Introduction
Analysis of financial statements using fundamental analysis helps us determine intrinsic
value of the business, and help us determine the value of stocks issued by publicly traded
companies. In the short run, there might be a number of factors that influence supply and
demand for a particular stock, however in the long run; fundamental indicators are a
primary determinant of a market capitalization of a business, and thus its share price. Thus,
some authors like Banz (1981) or Fama (1970) suggest that companies with low P/BV ratio
(price to book value) achieved significantly better results compared to companies with high
P/BV ratio. Their research indicates that companies in the bottom tenth of the P/BV ratios
have outperformed on average by one percent per month in terms of stock price change,
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International Conference on Economic and Social Studies (ICESoS’13), 10-11 May, 2013, Sarajevo
companies that were in the top ten percentile of value of P/BV ratios. One explanation for
this situation is that companies with high P/BV ratio were overpriced and thus provided
little return on investment. Some research (Michaely et al., 1995) shows that although
initial market reaction is slow, the market does react significantly to the company's
earnings information as represented by some fundamental indicators such as EPS (earnings
per share).
Other authors have demonstrated that the use of fundamental analysis can be used to
determine stock price movement in the future, and thus achieve extraordinary returns,
significantly higher than market average. Thus Ou and Penman (1989) used multivariate
analysis of financial ratios; and by using statistical tools derived a composite indicator that
predicts a change in the company's earnings and thus the movement of its stock. Other
authors reached similar conclusions (Lev and Thiagarajan, 1993), while Abarbanell and
Bushy (1998) as well as Piotrski (2000) successfully determined which companies will
have above average stock returns as well as those that will underperform the market, by
using financial statements and fundamental indicators.
The purpose of this paper is to examine whether stock price of companies quoted on
Sarajevo Stock Exchange is truly determined by the performance of the issuers, or we have
other stock price determinants, such as speculative trading, being the driving force behind
the change in value of securities. This is a critical issue to examine since small and
relatively new exchanges such as Sarajevo Stock Exchange (SASE), are particularly
vulnerable, and in a country with underdeveloped investor protection mechanisms and
infrastructure, might lead to a loss of confidence in capital markets, thus perverting the
purpose of those markets in a first place and reducing them to a forum for secondary
exchange of securities. Events after 2007 peaks on Sarajevo Stock Exchange, and in
particular its low trading volume, suggest that this might be taking place at the time.
Methodology
In order to determine whether the performance of a business is reflected in the stock price
change on Sarajevo Stock Exchange we will analyze financial reports of selected
companies, determine fundamental indicators, and examine if there is a correlation
between a change in fundamental indicators and corresponding share price traded on
SASE. The following selection criteria were used to select 10 companies examined in this
paper: corporate shares were traded during the entire period examined in the paper, that is
from 2003 to 2008; during this period, shares were traded during at least 250 trading days;
at least 10% of the total shared issued by the company changed owners during that period,
excluding the initial registration of shares; the company was listed in year 2002; market
capitalization is over KM 30,000,000.00 in 2008; the companies were registered at least
five years prior to being listed on SASE.
Using the above mentioned criteria, I selected the following 10 companies for the research
sample: Bosnalijek dd, BH Telecom dd, Hidrogradnja dd, Elektroprivreda BiH dd,
Elektroprivreda HZ HB dd, Klas dd, Vranica dd, Vispak dd, Šipad Commerce dd and
Bihaćka Pivovara dd. The selected companies are the leaders in their industry sector in
Bosnia, significantly exceed the selection criteria, are well known and established in the
region in various industries such as construction, telecommunications, food industry,
timber industry and the energy sector.
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International Conference on Economic and Social Studies (ICESoS’13), 10-11 May, 2013, Sarajevo
Fundamental indicators will be calculated, for a period from 2003 to 2008, as well as their
mean, standard deviation and percentage deviation. The indicators will be divided in two
groups, those that are share price independent and those that are share price dependent. The
first group of ratios consists of ROE (return on equity), ROA (return on assets), BVPS
(book value per share), EPS (Earnings per share) as well as asset (ATO) and equity
turnover (ETO) ratios. The second group of indicators consists of MkCap (market
capitalisation in absolute terms), P/Bv (price over book value, P/S (price over sales) and
P/E (price over earnings) ratios. This will enable us to have a set of ratios whose
percentage deviation should be correlated between two sets, if share price change is
correlated with fundamental indicator change, that is with the corporate performance. The
indicators will be indexed, with year 2003 being a base year with index 1. The next step is
to calculate correlation index between a set of indicators and stock price change, in order to
determine if there is a linear relationship between the change in fundamental indicators and
share price change:
High correlation index would suggest causal relationship between the stock price change
and a change in fundamental ratios, which represent corporate performance.
Results
Since this analysis has generated a significant amount of data, which would consume
significant amount of space, only relevant derived data will be presented.
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International Conference on Economic and Social Studies (ICESoS’13), 10-11 May, 2013, Sarajevo
P dependent
P independent
P dependent
P independent
P dependent
P independent
P dependent
P independent
Table 1: Indices of price dependent and price independent ratio change in a period of
2003-2008, with 2003 being a base year, for selected publicly traded companies on SASE
ROE
ROA
BVPS
EPS
ETO
ATO
MkCa
p
Bosnalijek d.d.
StDev Mean
0.088
0.953
0.106
0.831
0.165
1.234
0.136
1.170
0.060
1.067
0.081
0.930
% Dev
9.29%
12.73%
13.33%
11.65%
5.58%
8.73%
BH Telecom d.d.
StDev Mean
0.087
0.962
0.076
0.898
0.084
1.139
0.071
1.091
0.043
0.951
0.065
0.889
% Dev
9.00%
8.51%
7.36%
6.54%
4.57%
7.33%
Vispak d.d.
StDev
Mean
0.784
-0.110
0.732
-0.082
0.020
0.979
0.769
-0.101
0.117
1.080
0.040
0.972
% Dev
-712.52%
-895.41%
1.99%
-759.15%
10.80%
4.16%
3.030
4.692
64.59%
1.476
2.781
53.09%
2.107
3.420
61.62%
P/Bv
1.996
3.443
57.96%
1.199
2.396
50.03%
2.210
3.519
62.82%
P/S
1.937
3.231
59.94%
1.267
2.537
49.96%
1.817
3.194
56.88%
P/E
2.320
3.717
62.41%
1.370
2.550
53.74%
23.269
15.642
148.76%
ROE
ROA
BVPS
EPS
ETO
ATO
MkCa
p
JP Elektroprivreda BiH d.d.
0.896
-0.275 -326.05%
0.863
-0.274 -315.50%
0.049
0.924
5.33%
0.841
-0.283 -296.53%
0.317
1.374
23.04%
0.300
1.348
22.26%
Elektorprivreda HZHB d.d.
0.629
-0.497 -126.65%
0.640
-0.514 -124.55%
0.253
1.236
20.50%
0.760
-0.627 -121.23%
0.227
1.227
18.49%
0.199
1.227
16.23%
Sipad Komerc d.d.
62.823
-25.282
55.505
-22.079
93.295
86.254
49.764
-18.475
0.545
0.444
0.503
0.506
-248.49%
-251.40%
108.16%
-269.35%
122.61%
99.51%
1.540
2.174
70.84%
2.664
3.351
79.50%
6.249
5.843
106.94%
P/Bv
1.812
2.424
74.75%
2.161
2.709
79.78%
1.070
0.864
123.82%
P/S
1.102
1.684
65.47%
1.540
2.149
71.64%
6.131
6.874
89.19%
P/E
15.053
8.494
177.22%
12.064
-1.752
-688.58%
2.813
2.740
102.65%
ROE
ROA
BVPS
EPS
ETO
ATO
MkCa
p
Hidrogradnja d.d.
1.394
-0.343 -406.50%
2.195
-0.731 -300.36%
0.006
0.991
0.58%
1.377
-0.337 -409.14%
0.192
0.695
27.59%
0.240
0.945
25.43%
Bihacka Pivovara d.d.
0.492
1.376
35.79%
0.597
1.449
41.19%
0.192
1.257
15.27%
0.773
1.752
44.11%
0.094
1.095
8.55%
0.099
1.140
8.71%
Vranica d.d.
29.729
-10.014
41.478
-13.905
1.047
1.942
73.219
-26.027
0.423
0.785
0.313
0.962
-296.88%
-298.30%
53.92%
-281.32%
53.88%
32.50%
2.184
2.870
76.09%
0.977
2.212
44.19%
10.569
8.457
124.97%
P/Bv
2.212
2.901
76.24%
0.552
1.703
32.40%
3.243
3.316
97.78%
P/S
4.545
5.006
90.79%
0.592
1.576
37.60%
8.831
7.062
125.05%
P/E
9.394
7.546
124.49%
0.507
1.310
38.71%
1.358
1.141
119.05%
ROE
ROA
BVPS
EPS
ETO
ATO
MkCa
p
Klas d.d.
0.409
0.486
0.404
0.448
0.025
1.020
0.418
0.497
0.113
1.091
0.103
0.927
84.09%
90.29%
2.46%
84.08%
10.38%
11.13%
0.839
1.900
44.17%
P/Bv
0.785
1.854
42.36%
P/S
0.681
1.696
40.17%
P/E
7.215
7.992
90.28%
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International Conference on Economic and Social Studies (ICESoS’13), 10-11 May, 2013, Sarajevo
Correl
Net income
0.552
ATO
-0.604
ROE
-0.493
ROA
-0.774
Net income
ATO
ROE
0.072
-0.311
-0.517
ROA
Net income
ATO
ROE
ROA
0.426
Net income
ATO
ROE
-0.428
0.466
-0.408
ROA
-0.414
Net income
0.254
ATO
-0.684
ROE
0.255
ROA
0.297
Bihacka Pivovara
d.d.
Correl
Net income
0.474
ATO
-0.132
ROE
0.254
ROA
0.266
Net income
ATO
ROE
-0.363
-0.319
-0.380
-0.653
ROA
-0.445
0.434
0.325
0.419
Vranica d.d.
Ratio
Net income
ATO
ROE
-0.226
-0.552
-0.248
ROA
-0.230
Net income
ATO
ROE
-0.332
0.201
-0.326
ROA
-0.348
Net income
0.296
ATO
-0.696
ROE
0.284
ROA
0.283
Klas d.d.
Ratio
Sipad Komerc
Vispak d.d.
d.d.
JP
JP
Hidrogradnja
BH Telecom
Elektroprivred Elektroprivred
d. d.
d.d.
a HZHB d.d. a BiH d.d.
Bosnalijek d.d.
Table 2: Correlation between selected fundamental indicators and stock price change for a
period of 2003-2008
Discussion
In the observed time period, six out of ten companies observed in this study, suffered net
loss for the period of 2003-2008, which was covered by the reduction in the capital. Yet at
the same time corporate share prices have risen dramatically, with mean value for the
period ranging between 190% of the index year mean price (year 2003) up to 846% for a
company Vranica d.d., as an example. Other companies enjoyed similar growth in share
value, and the growth was most notable in 2005 – 2007 period, despite poor and declining
fundamentals. Only Bihacka Pivovara d.d. demonstrated same level of change of price
dependent vs. price independent ratios; in the case of this company, corporate performance
parameters grew proportionally to the share price, and this is a rare case of share price
growth substantiated by the growth in corporate intrinsic value.
Volatility of the market at the time was very high. Previous research by author (Dzanic et
al., 2010) indicated that volatility of SASE index SASX-10 was about ten times larger than
Dow Jones Industrial Average. At the same time, correlation between those two indices
was -0.38474, and SASE-10 index grew by 57% in the first half of the year. This is an
indication of relative independence of SASE from major capital markets, when those
markets are relatively stable. With the onset of 2007 recession, volatility increased in the
United States, and capital markets started to mount losses. In 2007-2008 and with
increasing volatility and losses in the US capital markets, SASE quoted shares started to
lose value, especially in 2008. During that year, correlation between SASE and NYSE
indices was 0.84775 in sharp contrast to 2005, which is an indication of a crisis spillover
effect, as demonstrated by other authors(Longin and Solnik 2001), in other emerging
markets (King and Wadhwani 1990).
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International Conference on Economic and Social Studies (ICESoS’13), 10-11 May, 2013, Sarajevo
In terms of correlation of share price with fundamental indicators, seven out of ten
companies had correlation coefficient for net income in a range less than 0.4, indicating no
linear relationship between share price movement and change in corporate earnings. One
company even had a strong negative correlation coefficient for net earnings
(Elekroprivreda HZHB) indicating that as earnings dropped over the period, and the
company netted a loss, share price war growing.
The results of the research suggest that fundamental indicators are not a driving force
behind a change in share price of companies quoted on SASE, as demonstrated in seven
out of ten companies examined in this study. Only one company had magnitude of change
of fundamental indicators correlated to share price performance, while the other two
demonstrated direction, and not necessarily the magnitude.
Conclusion
The research determined that fundamentals do not determine share price in the examined
period. We can thus argue that irrational or speculative determinants are at play; a
discouraging prospect for a developing capital market. The result of high-risk highvolatility market situation was a significant decline in value of securities listed on the
exchange. This decline led to a loss of confidence of individual investors in the exchange
which can be illustrated by low trading volumes in the last few years, usually in the region
of 1% to 3% of 2007 levels. The exchange thus is incapable of serving most of functions
traditionally associated with the business. In order to discourage speculative activities,
authorities must learn to cope with the problem and legislation as well as oversight has to
be improved, if confidence is to return to the Sarajevo Stock Exchange, together with the
lost trading volumes.
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International Conference on Economic and Social Studies (ICESoS’13), 10-11 May, 2013, Sarajevo
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